Who Will be the First One to Suffer from Mr. Trump, NIO or Tesla?
COVID-19 and China
Tesla. PHOTO: Credit to Unsplash

According to CNN, the top US trade negotiator said Monday that the Trump administration will be moving forward on President Donald Trump's threat to escalate tariffs on USD 200 billion of Chinese goods effective Friday.

Trump tweeted that he would raise import taxes on USD 200 billion worth in Chinese products to 25 per cent from 10 per cent as of Friday. That's on top of a 25 per cent duty on another USD 50 billion worth of Chinese imports. Beijing had imposed penalties on USD 110 billion worth of American goods.

If Trump sticks to his decision, the U.S. carmaker Tesla, which have built a factory in Shanghai, China and have many employees, will be seriously affected. Because the core computer of Tesla's Chinese-made Model 3, known as the 'Brain', was rejected for exclusion from Donald Trump's 25% tariffs.

Tesla's Layout in China

Tesla and other Chinese-made products, including aerospace parts and biotechnology equipment, have been denied tariff exemptions because they are seen as strategically important for the made in China 2025 program, according to the filing of the United States trade representative office.

The 3.0 Autopilot electronic control unit (ECU) will bear the full tariffs. In addition, the tariff exemption separately applied by Tesla for the Model3 central control screen manufactured in China is still in progress. Tesla did not immediately respond to a request for comment.

According to Reuters, Tesla has filed a complaint with the office of the United States trade representative (USTR) since first applying for a tariff break in 2018. Tesla told U.S. officials at the time: “increased tariffs on this particular part cause economic harm to Tesla, through the increase of costs and impact to profitability.” Moreover, Tesla claims it cannot find capable manufacturers anywhere outside China.

They told the U.S. trade representative's office: "If another supplier is chosen, the project will be delayed for 18 months due to cleanroom setup, production line validation and staff training."

Tesla claimed that: "For a product as safety critical to consumers, and critical to the essence of Tesla, we turned to industry experts who could achieve this quality and complexity in addition to the deadlines, which was not possible outside of China."

China is the world's biggest NEV market as well as Tesla's biggest market outside the United States. On June 16, 2018, the tariff commission of the State Council announced that the first batch of goods imported from the United States, including American-made automobiles, with a 25% tariff increase will be worth about USD 34 billion from July 6. That means most U.S.-made cars declared after that date will be subject to the 25 per cent surcharge.

Subsequently, Tesla, which has always been the world's unified selling price, had no choice but to increase the price in China. The price of Model S and Model X generally increased by more than CNY 100,000, with the highest price rising by more than CNY 250,000. The cheapest Model S costs CNY 850,000, this has put a squeeze on Tesla's sales.

The biggest advantage of Tesla in building a factory in Shanghai is that it avoids high import tariffs and has lifted the restriction on foreign shares in new energy vehicles. It is really good news for the company, which has always insisted on building a factory solely by itself.

For now, it looks like Tesla will be caught in the crossfire for years to come unless it changes its production base. Because industry commentators say tariffs will remain in place regardless of the outcome of the U.S.-China trade talks. Again, this is not a short-term bargaining chip, but a long-term economic attack.

Trade frictions with China could make the Model 3 more expensive globally. In addition to the possibility that the Chinese government could impose high tariffs on American cars, Trump's tax could make it difficult for Tesla to obtain supplies of core components.

NIO Known As the Tesla of China

Tesla sells about 20,000 vehicles a year in China, less than 10% of its global sales. About 70 per cent of its revenue comes from the U.S., but it wants to reduce its dependence on the U.S. and boost sales in China.

Tesla now ships cars from the U.S. to China, putting it at a cost disadvantage there. Trade friction has prompted Beijing to impose additional tariffs on American-made cars. Tesla's revenue in China fell by 13 per cent in 2018 from a year earlier. The company hopes the Model Y, a popular compact SUV, will change that. But the rise of local electric car start-ups in China poses a threat.

The most prominent example is NIO, known as the Tesla of China. The company launched its first car three years after its founding and went public on the New York stock exchange last September. NIO has brought together the world's automotive and technology leaders across our offices in San Jose, Munich, London, Shanghai, and eight other locations.

NIO has been called "the Tesla of China" because its strategy to attract customers to the electric car market is similar to Tesla in many ways. The company currently sells two high-performance SUVs, the ES6 and ES8, which both have advanced (not yet operational) autonomous systems and in-car driving systems. However, these are all Tesla features currently enjoyed by Tesla drivers.

Last year, NIO hit its goal of delivering 10,000 vehicles, all of them customized. Because of China's manufacturing capacity, LI Bin, the CEO of the company expects to ramp up production quickly in the next few years, and he eventually hopes to have NIO cars on the road in the United States.

The company already has offices in San Jose, California, and employs more than 700 people in its global software development centre. But NIO's development in the United States has not always been smooth.

A few days ago, statistics from a filing with California's Employment Development Department show that Chinese EV startup NIO has laid off 70 employees across two Silicon Valley offices, one of which is now closed.

NIO's layoffs are mainly due to the high operating costs in the United States and aim to improve management efficiency. At the end of 2018, the company had 640 employees in its San Jose office alone and about 10,000 employees worldwide, according to NIO's financial documents. The cuts are small relative to its total number of employees, but they're a sign that the company's early momentum is cooling.

These Companies' plans to Enter the U.S. Market May Fail

In the long run, trade frictions may benefit some new energy automobile enterprises and force the technological innovation of China's own brands.

For example, make a major technological breakthrough in the new energy battery, and reduce costs. But the strategic pace at which some Chinese brands want to enter the U.S. market could be affected. According to statistics, the trade war may lead to a greater impact on the business of enterprises, including BYD, NIO, JAC, and CHJ, and other car companies that operate sharing services abroad, as well as some low-speed electric car companies.

In early 2018, NIO CFO XIE Dongying told CNBC that the company has announced its next steps to investors and said the first 10,000 ES8 all-electric cars have sold out. XIE also highlighted NIO's plans to enter the U.S. market by 2020.

On March 10, 2016, NIO unveiled its North American strategy and the first concept car EVE at the global technology trends conference (SXSW) in Austin, Texas. The company said it would launch driverless electric cars for American consumers by 2020. In October 2016, it obtained a test license for a driverless car issued by the California government.

In addition, some other Chinese electric vehicle manufacturers have plans to enter the U.S. market, usually starting with the establishment of R&D centres in the U.S. XPeng Motors debuted its first product, the G3, at CES in January 2018. Its self-driving road test permit is obtained in California, U.S., in September 2018.

Another Chinese start-up, WM Motor, also has an AI research institute in silicon valley. In December 2017, WM officially displayed its brand LOGO in times square, New York, and announced that its first mass production model will be officially unveiled on December 11.

SHEN Hui, Founder of WM Motor, said in an interview that the company has a team studying IPO proposals in the United States and China, but did not give a possible time frame. On January 12, 2019 (U.S. west time), WM Motor launched "Project W" in Silicon Valley. The plan is to evolve WM into a data-driven smart hardware company.

On October 11, 2017, CHJ, a Smart Electric Vehicle startup, signed a letter of intent with SCOOT Networks, a timeshare rental operator in the United States. The two sides will launch a pilot project of Shared travel service based on CHJ SEV (Smart Electric Vehicle) in San Francisco, the United States.

About China-U.S. Trade Friction

The trade friction between the U.S. and China was one of the biggest stories of 2018. The conflict concerns not only the two countries but the entire global economy. President Donald Trump blamed China for the U.S. trade deficit and signed an executive memorandum on March 22 imposing tariffs on up to USD 60 billion worth of Chinese imports.

A few weeks later, the White House released a list of 1,300 Chinese goods that could be subject to a 25 per cent tariffs. The list worth USD 50 billion and specifically targeted Chinese high-tech industries.

For the automotive sector, the biggest impact of the U.S. tax list will be on sensors and navigation devices for autonomous driving, and motors and batteries for new energy vehicles. Sensors and navigation devices are the key technologies that will enable autonomous driving in the future. However, these areas are dominated by American manufacturers, so China exports less to the U.S.

Motors and batteries are the core of new energy vehicles. At present, domestic battery products of CATL are exported to BMW, Volkswagen, Mercedes and other car companies, accounting for a small proportion of exports to the United States. Compared with an annual sales base of over 20 million vehicles in the Chinese market, the changes in the Chinese and American automobile import markets will not have much impact on the overall automobile market. Therefore, the impact of Sino-us trade friction on the auto industry will not be large for the time being.

However, in the long run, when the industry enters the white-hot competition stage and China fails to master the core technologies, the tariff list may hinder China from mastering the core technologies of low carbon, information and intelligence of automobiles. For the domestic automobile industry, it is necessary to master core technologies such as intelligent driving, motor and battery as soon as possible.

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